Hello, this is attorney Bae Gi-hyung of Cheongchul Law Firm.

On public infrastructure projects and large private developments, it is common for the construction period to be extended by months or even years for reasons that are not the contractor's fault — delayed budget allocation, delayed land compensation, or repeated design changes attributable to the employer.

When the schedule slips, the contractor has no choice but to keep the site running and absorbs enormous additional cost in the form of overheads. These include not only site staff salaries and the upkeep of temporary offices, but also losses on idle heavy equipment and the erosion of head office overhead. Yet at settlement the employer routinely refuses to pay, saying "there is no provision for it" or "the evidence is insufficient", and the amount in dispute often grows into the billions of won.

This article explains how a contractor should objectively quantify, evidence and claim the site overhead, head office overhead, idle equipment cost and productivity loss it has borne because of employer-caused delay.

Employer-caused delay: the legal basis for overhead compensation and how it is calculated

[Question] Where a project is delayed through the employer's fault, can a contractor recover not only direct site upkeep costs but also idle equipment costs and head office overhead?

[Answer] In short, yes — if the claim is substantiated with objective records, the contractor can recover site overhead as well as head office overhead, idle equipment cost and productivity loss.

Unless a statutory provision expressly prohibits compensation, actual losses caused by the other party's fault should be compensated, including under principles such as change of circumstances. The calculation and evidencing of each overhead category is set out below.

1. Site overhead and head office overhead

This is the most basic head of loss in a delay claim. Site overhead (indirect labour and expenses) is in principle calculated on the actual costs incurred during the extended period. Head office overhead requires more care. Current practice tends to compute it simply as a percentage of the increased direct cost, but on a delay claim head office overhead accrues as a function of time, independently of any change in direct cost. It is therefore more rational to take the overhead percentage set at tender, divide it by the contract period to obtain a daily allocation rate, and multiply that by the period of employer-caused extension (the approach underlying the Hudson formula and similar methods).

2. Idle equipment cost

This is the cost incurred when plant mobilised to site stands idle because of delay.

• Owned plant: because depreciation continues regardless, applying 50% of the hourly ownership cost under the standard unit cost tables for the number of days delayed is accepted in Korean and international practice as a reasonable basis.

• Hired plant: for externally hired equipment, the claim is calculated directly on the hire charges actually incurred during the extended period, evidenced by invoices and tax invoices.

3. Productivity loss

Delay, frequent design changes or instructions to accelerate disrupt the flow of work on site and sharply reduce efficiency. That, too, is a clear loss to the contractor. To quantify it, earned value analysis — comparing the unit cost of work in the periods affected by the disruption with the unit cost in unaffected, normal periods — is effective. In other words, the loss is proved objectively by calculating the difference in cost incurred against what normal working would have cost.

The practical key: proving fault and loss with a CPM programme and expenditure records

Recovering these overheads in full depends on rigorous programme management and transparent site accounting by the contractor.

Sending general letters when the works fall behind is not enough. Only by analysing, through a Critical Path Method programme, that responsibility for the delay lies with the employer, and by systematically accumulating daily work records, wage ledgers, plant hire agreements and expenditure evidence for the extended period, can a contractor have its rights recognised in litigation or arbitration.

Claims for indirect construction cost combine complex cost calculation methodologies (actual cost standards, unit cost tables and the like) with analysis of responsibility for each day of delay, so specific legal review is needed from the earliest stage of the delay.

Drawing on a deep understanding of overhead claims on major public and private projects, Cheongchul Law Firm provides tailored solutions for recovering the substantial losses contractors unfairly bear. If you are facing difficulties over an extension of time or the settlement of site upkeep costs, please consult the specialists at Cheongchul Law Firm.

-------

Attorney Bae Gi-hyung has served at the Defense Installations Agency and in the construction and real estate teams of major law firms, advising across the full life cycle of government contracts and construction projects — large-scale construction, defence facility projects and SOC infrastructure — and resolving the related litigation. If you need assistance with government construction contracts, private construction projects, public procurement, or state, local and public property matters, please contact him at any time.

* * *

Cheongchul Law Firm is composed exclusively of attorneys from Korea's five largest law firms, the prosecution service and the legal departments of major corporations, and responds with a team of specialists in the relevant fields rather than a single lawyer. Cheongchul goes beyond resolving isolated issues to provide comprehensive solutions across a client's business, focusing on achieving what the client ultimately wants. If you need help reaching your goals, please do not hesitate to contact us.